Utility Week

UTILITY WEEK | NOVEMBER 2021 | 19 Policy & Regulation is therefore not surprising that opinions are split on Ofgem's proposals – though not always along size-of-company lines. The consultation began in March and closed in May. Ofgem has said that it will issue a statutory consultation in the autumn. In the meantime, according to retailers, Ofgem has contacted all suppliers to gather more information, including how much of customers' credit is held by companies, and the administration costs that the new pro- posals might cost. Retailers say that the proposed changes will particularly a• ect those suppliers who have entered the market in the past 5-8 years who have actively advertised for customers to sign up and pay by direct debit, and pay for that in advance. "They've built their busi- ness based on that. The larger suppliers with legacy customers wouldn't have designed their business to rely on direct debit so much," said one of those interviewed. Others point out that the current system process already limits the degree of mutu- alisation. "Quite o‚ en, suppliers o• er to cover all of the credit balance themselves to increase their chances of getting those cus- tomers. It's usually the RO cash collected from customers that is mutualised rather than the credit balances." There has been concern that with so many suppliers going out of business the SoLR process would not hold up, and that Ofgem would not be able to get suppliers to take on these customers. But so far this has not materialised and larger energy compa- nies have stepped in to take customers of all nine failed suppliers. Meanwhile, it has been reported that Ofgem has appointed City consultant Teneo to be on standby to act as special administrator in case other suppliers need to be rescued and there is no retailer prepared to step in. Discouraging investment Both those for and against the proposals put forward arguments that reforms to credit bal- ances would make it harder for companies to be pro‡ table and would therefore discourage investment. Said one retailer: "The current credit balance mutualisation proposals will not address a• ordability issues. Instead, they will add cost to suppliers and consequently add cost in energy bills. Auto refunds or threshold mechanisms do not help cus- tomers reduce energy bills." He described the proposal as a "headline grabber", and felt that it was another example of Ofgem's approach of treating the symptom not the cause. Demanding prepayment is not an unusual approach either for goods and ser- vices in other sectors, such as insurance. Others, though, have been far more vocal in their support. At the time the proposal was announced, Green Energy CEO Doug Stewart told Utility Week: "Perhaps this is the moment that we see a realignment between the energy industry, the customer and the regulator – one that is based on sound ‡ nance, trust and transparency. Put it another way, would you shop at Tesco if they said you had to pay £200 today to be allowed in store next week? Well done Ofgem for making the move." However, acknowledging the concerns of those others who say that customers prefer to build up credit in the summer to pay for he‚ - ier costs in the winter and could ‡ nd them- selves in debt, he added: "Great care should be taken to ensure that customers who have a credit refund are not further exposed to building up a debt because the refund was made at a point in time before any increased winter usage and future payment levels are not adjusted to take that into account." A further potential downside is that it could expose retailers to greater debt. If cus- tomers' bills are based on estimates rather than meter readings (it costs suppliers to send round meter readers if the customer has not yet had a smart meter installed), suppli- ers will be forced to refund on an estimate. Then customers could leave having had esti- mated credits returned but in fact be in debt. This would leave retailers very little scope for recovering the money – and no incentive either for customers to install smart meters. "The maths doesn't add up. There's not enough free cash in the industry, and it's not being spread across the supply chain." He added: "Of itself, this won't push the market, but it runs a big risk in the context of everything else. And it's a lot of money, with- out any evidence of bene‡ t to consumers, and a guarantee of no bene‡ t to investors." One thing, however, that everyone can agree on is the sentiment expressed by one interviewer: "If some suppliers are asked to return large credit positions and they're using this to fund their business then this could well lead to more failures. "We've always supported competition in the market, which has already delivered for customers in terms of improved service, price competition and other innovation. But this must be responsible competition from a mix of suppliers that are able to build sus- tainable businesses and don't use customer credit balances to fund a business. "It's okay for consumers not to pay their bills on time, but it's not okay for the sup- plier not to pay them on time? That's the message." Again, the issue of what was equitable came to the fore: "If you're asking me to give credit balances back, I should enforce debit balances. You cannot have it both ways. "If you're going to work on that basis, honestly the margins would need to go up. Even if you were getting outside funding, who's going to give you that when you're making 1 or 1.5 per cent. That could swing easily into minus with one little move, which is the problem. Denise Chevin, freelance journalist in association with Download the report Download the report Pro tability Versus A ordability – Time for an Energy Reset free at: https:// utilityweek.co.uk/ pro tability-versus- a ordability-time- for-an-energy-reset/ I N S I G H T R E P O R T Profitability versus affordability - time for an energy reset October 2021 | In association with In this report Foreword Introduction to this report The long build-up to a crisis Why it's time for a reset Changes ahead that could undermine investment confidence Making energy affordable Concluding remarks - where next? Commentary A Utility Week sentiment report in association with Gentrack on the need for a new approach to balancing fair costs within a competitive but sustainable energy retail market.

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